If you’ve owned your home for a few years, there’s a good chance you’ve built up valuable home equity without even realising it. As property values increase and your mortgage balance decreases over time, using home equity to invest or buy a second property is an increasingly profitable trend.
Apart from purchasing investment property or buying a second home, many Australian homeowners choose to use home equity to renovate or diversify into other investments, such as shares. When used strategically, accessing the equity in your home can help you grow your wealth more quickly without needing to save a large cash deposit.
As mortgage brokers, one of the most common questions we’re asked is whether it’s possible to use equity as a deposit instead of saving tens of thousands of dollars. In many cases, yes. Depending on your financial position, your borrowing capacity and the amount of usable equity available, you may be able to leverage the equity in your existing home to achieve your next financial goal. However, regardless of your objectives behind using home equity, it’s important to understand both the opportunities and the risks before making a decision.
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What is Home Equity?
Home equity is the difference between the market value of your home and the amount you still owe on your home loan. In simple terms, it’s the portion of your property that you own, not the bank.
Let’s say your home is worth $900,000, and your outstanding home loan balance is $400,000, then you have $500,000 in equity. As you make your mortgage repayments and reduce your loan balance, or as your property’s value increases, the amount of equity in your home grows.
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Home equity is more than wealth on paper, it’s an asset that can fund your future financial goals. Depending on your borrowing capacity and your lender’s requirements, you can use your home equity to renovate, invest or consolidate higher-interest debts.
However, it’s important to understand that home equity and usable equity are not the same thing. While you may have significant equity in your property, lenders generally won’t allow you to borrow all of it. Getting a loan to value ratio (LVR) assessment is recommended to determine your borrowing amount and interest rates.
Calculating Home Equity Loan
Calculating home equity is quite straightforward. Simply subtract the outstanding balance of your home loan from the current market value of your home.
Here’s how we go:
Home Equity = Current Property Value – Outstanding Home Loan Balance
So, if the current value of your home is $900,000, and your outstanding home balance is $300,000, your home equity amounts to $600,000 after subtraction. You have $600,000 of equity in your home.
The most important part of the calculation is knowing what your property is actually worth. While online property estimates can provide a useful guide, lenders will generally rely on a professional property valuation or their own valuation process when assessing how much equity you may have available.
You can use a home equity calculator to estimate your equity before speaking with a lender or mortgage broker. Keep in mind that calculators provide estimates only and don’t determine how much you’re able to borrow.
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Buying an Investment Property Using Home Equity
For many Australians, using equity to buy an investment property is one of the most effective ways to grow long-term wealth, all without having to save a large cash deposit.
Instead of waiting years to accumulate savings, you can use the equity in your home as a deposit for your next purchase. This allows you to enter the property market sooner while keeping your savings available for other expenses, such as stamp duty, legal fees or renovations.
A common way to do this is by taking out an equity loan on your house or increasing your existing home loan. Rather than borrowing against cash you’ve saved, you borrow against the equity you’ve built in your property. The released funds can then be used as a deposit and purchasing costs for an investment property, while a separate loan is often established for the remaining purchase price.
One of the biggest misconceptions I have seen homeowners have is that they need a 20% cash deposit to purchase any investment property. In many cases, it’s not true at all. If you have enough equity to spare, and your income supports the repayments, you can easily purchase an investment property using your available equity instead.
When used strategically, home equity for investing can be a powerful way to build an investment portfolio. However, because your home is used as security, it’s important to ensure the investment aligns with your long-term financial goals and that you can comfortably manage the additional repayments.
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Buying a Second Home vs Buying an Investment Property
Many homeowners also use equity to buy another house, while one can assume that it’s pretty much the same thing whether you’re buying a second home or an investment property, the lending process can vary depending on the purpose.
If you’re planning to buy a second home as your new primary residence, lenders will assess your overall financial position, including your existing home loan, the proposed new loan, your income, living expenses and any other debts. If you’re intending to sell your current home after purchasing your next one, timing becomes especially important. In many situations, a bridging loan may be suitable, allowing you to buy your next home before your existing property is sold.
On the other hand, if you’re using equity to buy an investment property, lenders will assess the purchase differently. Since the property is intended to generate income, they may include a portion of the expected rental income when calculating your borrowing capacity. Investment loans may also have different interest rates, lending policies and deposit requirements compared with owner-occupied home loans.
Ultimately, regardless of the type of loan, it’s worth obtaining a home loan pre-approval before you begin house hunting. Not only does it give you a clear understanding of your borrowing capacity, but it also allows you to make offers and engage in negotiations with greater confidence.
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How to Build Equity in Your Home?
Building equity in your home doesn’t happen overnight, several strategies are required to help accelerate your progress. In general, your equity grows in two ways: one by reducing the balance of your home loan and two, by increasing the market value of your property.
Pay Down Your Home Loan
Every mortgage repayment that reduces your loan principal increases the amount of equity you own. If your loan allows it, making extra repayments or increasing the frequency of your repayments, such as paying fortnightly instead of monthly, can reduce your loan balance faster.
While a portion of each repayment covers interest, the remainder is applied to your loan balance, gradually increasing your ownership in the property.
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Take Advantage of Property Value Growth
One of the easiest ways to build home equity is through natural property appreciation. As the value of your home increases over time, the amount of equity you own also grows, provided your home loan balance remains the same or continues to decrease.
While no one can predict the property market, homes in desirable locations with strong demand have historically experienced long-term capital growth. Regularly reviewing the value of your property can also help you identify opportunities to access your equity when the time is right.
Renovate to Increase Your Property’s Value
Another way to increase the market value of your home is to renovate. Improvements like modernising kitchens and bathrooms, updating flooring, improving street appeal or adding functional living spaces can often deliver a strong return on investment.
However, it’s important to avoid overcapitalising. Spending significantly more on renovations than the value they add to your property may reduce your overall return.
Use an Offset Account
If your lender offers a 100% offset account, keeping your savings in the account can reduce the amount of interest charged on your home loan while leaving your money accessible. Because more of each repayment goes towards reducing your loan principal, you can build equity faster without changing your minimum repayment amount.
Related: Offset Account Vs Redraw: The Core Differences.
Make Small Changes Consistently
Building equity is usually the result of consistent financial habits rather than just one major decision. Paying a little extra when you can, keeping money in an offset account, maintaining your property and reviewing your home loan regularly can all contribute to increasing the equity in your home over time.
How to Access Your Home Equity?
Building home equity is only part of the equation. The next step is understanding how to access your equity when you’re ready to achieve another financial goal. No matter the purpose, there are several ways to use your home equity. The right option depends on how much you need to borrow, how you intend to use the funds and which loan structure best suits your circumstances.
Home Equity Loan (Lump Sum Equity Loan)
A home equity loan, also referred to as an equity loan on your house, allows you to borrow a lump sum using the equity you’ve built in your property as security. The funds are paid to you upfront and can be used for a wide range of purposes, including buying an investment property, funding renovations, purchasing a vehicle or covering other major expenses.
Depending on the lender, the loan may be structured as a separate split loan or incorporated into your existing mortgage. Repayments are made monthly over an agreed loan term, with either a variable or fixed interest rate depending on the product.
Home Loan Top Up
One of the most common ways Australians access home equity is by increasing their existing mortgage, often referred to as a home loan top-up or loan increase. Instead of taking out a completely separate loan, your lender increases your current home loan, allowing you to borrow against the additional equity in your home.
Many borrowers choose this option because it can be simpler than applying for a brand-new loan. In some cases, you may also keep the same interest rate and loan features, although this depends on your lender and the product you’re currently on.
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Home Equity Line Of Credit
A home equity line of credit provides ongoing access to funds rather than paying the full amount up front. So, instead of borrowing a fixed amount immediately, you’re approved for a credit limit and can withdraw money as needed, up to that limit.
Interest is generally charged only on the amount you’ve used, making it a flexible option for projects completed over time, such as staged renovations or ongoing investment opportunities. Most home equity line of credit products have variable interest rates, meaning your repayments can change if interest rates rise or fall.
Despite the excellent flexibility of a line of credit, it requires immense financial discipline. Because funds remain available to redraw, it’s important to have a clear borrowing strategy and avoid using the facility for unnecessary spending.
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Refinancing to Release Equity
Another popular form of home equity financing is refinancing your existing mortgage. Refinancing involves replacing your current home loan with a new one, often with a different lender. As part of the refinance, you may be able to borrow additional funds based on the equity in your property.
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Many homeowners choose to refinance not only to access their equity but also to secure a more competitive interest rate, consolidate debts or improve their overall loan structure. However, before switching lenders, its important to consider the application fees, discharge costs, valuation fees or fixed rate break costs that may apply.
Reverse Mortgage
If you are a homeowner 62 or older, reverse mortgage might be for you. A reverse mortgage basically allows older homeowners to access home equity, without any monthly repayments required. However, this method can reduce home equity and may affect inheritance therefore, approaching with caution is advised.
With a reverse mortgage, borrowers can receive funds as a lump sum, monthly payments or a line of credit. The payout options are extremely flexible and can also be combined. Since the proceeds are not considered taxable income, a reverse mortgage is a very efficient way to add to your retirement income.
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Interest-Only Equity Loans
Some lenders allow borrowers to choose an interest-only repayment period when releasing equity, particularly if the funds are being used for investment purposes. During the interest-only period, you’ll pay only the interest charged on the borrowed amount rather than reducing the loan principal. This improves short-term cash flow and lowers your repayments for a set period.
However, once the interest-only period ends, repayments increase because you’ll begin repaying both the principal and interest. While this structure can suit certain investment strategies, it generally results in paying more interest over the life of the loan.
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How Much Does it Cost to Access Your Home Equity?
Accessing your home equity can involve costs, although the amount you’ll pay depends on your lender, the type of home equity financing you choose and whether you’re increasing your existing home loan or refinancing to a new lender.
Some borrowers don’t pay much, particularly if their lender is running a promotion that waives application or valuation fees. Others may incur several upfront costs, especially when refinancing or switching lenders.
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While releasing equity isn’t free, it can still be a cost-effective way to fund your property aspirations. I do advice comparing total costs against the long-term benefits to determine whether accessing your equity is the right move. Here’s an estimated breakdown to help you out:
| Cost | Purpose |
| Application or Loan Settlement Fee | For administration and loan set up |
| Property Valuation Fee | For valuation of property to determine how much equity you have available |
| Mortgage Registration Fee | Government fee for registering a new mortagge |
| Mortgage Discharge Fee (If Refinancing) | Charged by your existing lender when closing your current loan |
| Legal or Document Prep Fees | For preparation of loan documents and settlement administration |
| Fixed Rate Break Costs | May apply if you refinance or repay a fixed-term loan before the fixed-term ends |
| Lender’s Mortgage Insurance (LMI) | Applied if your total borrowing exceeds 80% of your property value |
| Ongoing Loan or Line of Credit Fees | Some home equity loans or line of credit facilities include annual or monthly account keeping fees |
What About Stamp Duty?
So, here’s where many of my own clients were confused. In most cases, stamp duty isn’t payable simply because you’re refinancing or releasing equity from your existing home. However, stamp duty or other government charges may apply if there’s a change in property ownership or if the transaction involves additional legal arrangements.
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Can These Costs Be Reduced?
Many borrowers are surprised to learn that some of these costs can be negotiated or avoided. Depending on the lender, promotional offers may include waived application fees, complimentary property valuations or cashback incentives for refinancing so, yes equity release costs can be reduced.
Pros and Cons of Using Home Equity Loan
A home equity loan can be an effective way to fund major expenses or invest in your future, but like any form of borrowing, it’s important to understand both the benefits and the potential risks.
As mortgage brokers, we encourage borrowers to consider not just how much they can borrow, but whether the additional debt aligns with their long-term financial goals and budget.
Advantages of a Home Equity Loan
- Access Significant Funds: Depending on the equity in your home, you can fund renovations, buy properties or invest in other income-producing assets with an equity loan without selling your home.
- Lower Interest Rates Compared to Unsecured Loans: Because your property is used as security, home equity loans generally offer lower interest rates than unsecured personal loans or credit cards.
- Flexible Borrowing Options: Many home equity lenders offer a range of borrowing options to suit different financial goals. Depending on your lender you may choose a lump sum equity loan, a home loan top-up or a home equity line of credit.
- Potential Tax Benefits: If you’re using equity to invest in income-producing assets, such as investment properties or certain managed investments, the interest on the borrowed funds may be tax deductible.
- Keep Ownership of Your Home: Rather than selling property to access capital, a home equity loan allows you to unlock the value you’ve built while continuing to own and live in your home.
Disadvantages of a Home Equity Loan
- Your Debt Increases: Accessing your home equity means taking on additional borrowing. While this can help you achieve your financial goals sooner, it also increases your overall debt and your ongoing repayment commitments. Calculate your debt to income ratio to understand how much debt you have compared to your income.
- Your Home is Used as Security: A home equity loan is secured against your property. If you experience financial hardship and cannot meet your loan repayments, your lender has legal rights to recover the debt, which may include selling the property as a last resort.
- Interest Rates May Change: Many equity release products, particularly a home equity line of credit, has variable interest rates. If interest rates increase, your repayments also rise, which can place additional pressure on your cash flow.
- It Can Be Easy to Overspend: Having access to a large amount of available credit can make it tempting to spend more than originally planned. This is particularly relevant with a line of credit, where funds remain available to redraw. Need a home loan, but you’re self-employed? Consider self-employed mortgages for flexible income assessment opportunities!
What is the Shared Equity Scheme?
A shared equity scheme is an alternative pathway into home ownership that allows eligible buyers to purchase a property with financial assistance from a government or participating organisation.
Instead of funding the entire purchase price yourself, the equity partner contributes a portion of the property’s value in exchange for an ownership interest. This reduces the amount you need to borrow, helping lower your upfront costs, mortgage repayments and, in some cases, the size of the deposit required.
Unlike a traditional home loan, where you own 100% of the property and borrow the remaining funds from a lender, a shared equity arrangement means you own a percentage of the home while the equity partner owns the rest. Over time, you may have the opportunity to purchase additional shares in the property, demanding on the rules of the particular scheme.
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Speak With a Home Loan Specialist
Got the concept but unsure where to start? At Nice Loans, we help homeowners explore their options and structure their lending to suit their long-term financial goals. We’ll not only explain how much equity you may be able to access, but also compare lenders, assess your borrowing capacity and guide you through the process from start to finish.
Every borrower’s situation is different, which is why we take our time to understand your circumstances before recommending a solution. Whether you’re using your equity to buy a second home, refinance or invest, we are an experienced mortgage brokerage working around Australia to help you make informed decisions with confidence.
FAQs
How much equity can I access?
The amount of home equity you can access depends on your property’s value, your oustanding home loan balance, your borrowing capacity and your lender’s lending policy. Generally, many lenders allow you to borrow up to 80% of your property’s value without requiring Lenders Mortgage Insurance (LMI).
Is it better to refinance or use an equity loan?
Refinancing can be a good option if you’re looking to access equity while also securing a more competitive interest rate, improving your loan features or consolidating debts. However, a home equity loan or a home loan top-up may be more suitable if you simply want to access additional funds without moving your existing mortagge to another lender.
How much can you borrow?
There is no fixed formula that determines how much you can borrow. While the amount of usable equity available is important, lenders also assess your income, existing debts, living expenses, credit history and ability to comfortably repay the loan. So, having substantial equity doesn’t automatically mean you’ll qualify to borrow the full amount. Before you make an offer, it’s advised that you obtain a borrowing capacity assessment or loan pre-approval so you know whether you can afford the home loan or not.
What is the difference between a home equity loan and a home equity line of credit?
A home equity loan provides a lump sum that you repay over an agreed loan term, making it suitable for one-off expenses such as renovations or purchasing another property. On the other hand, a home equity line of credit, works more like a revolving credit facility. You’re approved for a borrowing limit and can withdraw funds as needed, paying interest only on the amount you’ve used.
